Cash Flow, Profits And The Cash Conversion Cycle
Calculating cash flow is one of the most important tasks of the business owner. Revenue and expenses are rarely constant in a business and cash requirements need to be planned for shortfalls, seasonal factors or one time large payments. At the end of the day, a company that cannot pay its bills is bankrupt.
Unfortunately, while many business owners concentrate solely on their revenues and expenses to manage their cash flow, it's usually poor management of the cash conversion cycle that so often leads to a cash crunch in the business.What is the cash conversion cycle and why should I be concerned with it? The cash conversion cycle is simply the duration of time it takes a firm to convert its activities requiring cash back into cash returns.
The cycle is composed of the three main working capital components: Accounts Receivable outstanding in days (ARO), Accounts Payable outstanding in days (APO) and Inventory in days (IOD).
The Cash Conversion Cycle (CCC) is equal to the time is takes to sell inventory and collect receivables less the time it takes to pay your payables, or:
CCC = IOD + ARO ? APOWhy is this cycle important? Because it represents the number of days a firm's cash remains tied up within the operations of the business. It is also a powerful tool for assessing how well a company is managing its working capital. The lower the cash conversion cycle, the more healthy a company generally is. If you compare the results of the cycle over time and see a rising trend it is often a warning sign that the business may be facing a cash flow crunch.
Understanding the components of the cycle
When evaluating cash flow, those factors directly affecting profit, revenue and expenses, are easy to understand and their affect on cash is straight forward; decreases in costs or increases in profit margin results in less cash going out or more cash coming in, and increased profits.
However, the working capital components of the CCC are a little more complex. In simple terms, an increase in the amount of time accounts receivables are outstanding uses up cash, a decrease provides cash; an increase in the amount of inventory uses cash, a decrease provides cash; an increase in the amount of time it takes you to pay your payables provides cash, a decrease uses cash.For example, a decision to buy more inventory will use up cash, or a decision to allow people to pay for goods or services over 60 days instead of 30 days will mean you have to wait longer for payment, and will have less cash on hand. Below is a numerical example of the cycle: Accounts Receivable outstanding in days
+90Inventory in days
+60Accounts Payable outstanding in days
-72Cash Conversion Cycle
+78In the scenario, you have cash tied up for 78 days. It should be noted that you can have a negative conversion cycle.
If this occurs it means that you are selling your inventory and collecting your receivables before you have to pay your payables.
An ideal situation if you able to accomplish this. Before you say it is impossible, remember that companies such as Wal-Mart are today selling a large part of their inventory before they have to pay for it. While it is not easy it can be accomplished. An ExampleLet's assume you buy on trade credit from your supplier and an account payable is created. Your supplier wants full payment in 30 days, however, you are selling inventory very fast, sell the inventory a week later and are asking for full payment from your buyer in 7 days.
You are now managing your conversion cycle. Consider, on day 1 you generate an accounts payable for 30 days from now. On day 7 you sell the inventory and generate an accounts receivable, which your buyer will pay for in 7 days. What is your conversion cycle in the case? -14 days, pretty good and you congratulate yourself. On day 15, after you receive payment, you are flush with cash and have a choice of reinvesting the money or paying your supplier.
What action you take will probably depend on a lot of factors, but as your supplier has provided you interest free cash for another 2 weeks, you may want to use it for those two weeks to generate greater returns; maybe you have outstanding credit you can pay down, you can buy additional inventory, or you may just want to generate interest returns.Now consider that you also provide your buyers 30 days to pay you. On day 1 you generate an accounts payable for 30 days from now. On day 7 you sell the inventory and generate an accounts receivable, which your buyer will pay for in 30 days. What is your conversion cycle in the case? 7 days, not as good. You now have 7 days in your cycle during which you have repaid your supplier but will not receive payment for another 7 days from your buyer.
You either need extra cash on hand or a credit line to support you for those 7 days.What does this mean in terms of cash flow and your bottom line?
If you have $1 million in annual sales and your receivables are outstanding an average of 60 days, that means you have $164,383 in outstanding receivables.
Everyday extra day the receivables are outstanding (e.g. 61 days vs. 60 days) represents an extra $2,740 that is not available to use elsewhere. If you need a credit line to support your receivables and you pay interest at 8% that represents $13,000 in annual interest charges (expenses) based on an average loan balance of $164,000.
So, as you can see, the management of the conversion cycle can have a large impact on the business's cash flow and profitability. The management of your cash conversion cycle could determine whether you require a lending facility or not, or whether you can meet financial obligations..
Cash Back Credit Card: Earn While You Spend!
Copyright 2006 Edward Vegliante
Cash back credit cards are an excellent way to earn money while you spend! Instead of making purchases with standard credit cards, you might want to consider applying for cash back credit cards because such cards reward you with cash back on every purchase you make! Further, in addition to cash back on all of your purchases, cash back credit cards offer you the opportunity to afford additional savings, in ways you might not have imagined possible.
Cash Back
The obvious benefit derived from having cash back credit cards is the money that consumers get back on every purchase. Frequently, credit card issuing companies will supply credit card users with approximately 5% cash back on certain purchases like those made at drug stores, supermarkets, and gas stations. Additionally, many credit card companies will give 1% cash back on all other purchases. Needless to say, if you use your credit card frequently, such benefits...
Cash advance > Cash Back Credit Card: Earn While You Spend!
Faxless Payday Loan - Faxless Cash Advance Loan, The Easiest Payday Loan Process
If you are in a hurry for a payday loan, the last thing you want to have to do is fax in your documents of verification. That's no problem, nowadays, you can find many payday loan or cash advance loan companies that can verify your income and identification without you having to fax in any documents.To see a list of recommended faxless payday loan companies, click on the link toward the end of this article. Payday and cash advance loans are good in a situation where the fees you may incur not paying a bill on time, like rent or a credit card payment, exceed the fees of a payday or cash advance loan, which usually range from $20-$30 per every $100 borrowed for every 2-3 week period.When you are in a hurry for the money, you most likely don't want to take the time to fax in and gather documents. Most faxless or no fax payday loan companies will verify your income and other information by phone or electronically.Most payday loans will start you out with the ability to borrow up to $500...
Faxless Payday Loan - Faxless Cash Advance Loan, The Easiest Payday Loan Process
Cash advance > Faxless Payday Loan - Faxless Cash Advance Loan, The Easiest Payday Loan Process
Phet Cash Paintings Experience Surge in Popularity on the Eve American Artist Officially Becomes EBSQ Certified. Duane Cash and Phet Cash Art Still Hot.
(ContentDesk) April 2, 2004--Phet Cash Paintings have become the talk of the Internet since she started making her gorgeous poppy and abstract figure acrylic art.
Even after a recent article in a reputable online art newspaper recently said "Paintings by Duane Cash Gaining Popularity," now the paintings of Phet Cash have been experiencing that same type of public appeal.The American Art Couple, Phet Cash and Duane Cash, work together through Cash Art Studio (www.cashartstudio.com), as well as their eBay store (http://stores.ebay.com/cashartstudio?refid=store) now as EBSQ Certified artists work to produce fine art paintings that reach a wide audience.
Their website, previously reported to have doubled in visits, has now eclipsed all previous expectations by tripling the number of total visits to over 14,000 in just one...
Cash advance > Phet Cash Paintings Experience Surge in Popularity on the Eve American Artist Officially Becomes EBSQ Certified. Duane Cash and Phet Cash Art Still Hot.
PayDay Loan or Cash Advance Loan - A Post Christmas Gift
December to January is the longest period of the year between pay days. Add to that the increased spending over the Christmas shopping season and many people find themselves short of cash in January. Unfortunately Santa Claus does not bring the gift of reduced liabilities and bills in January, but often these bills are even greater.
To avoid falling behind in your commitments, and to maintain your credit score and credit rating, a Payday Loan or Payday Cash Advance may provide the perfect solution. If you are in need of extra cash until your next pay day, you may want to consider applying for a payday loan or cash advance online.
A Payday Loan can be obtained online with no credit check. If you have a bad credit record, this will not disqualify you from obtaining a Payday Loan.
The loan proceeds can often be deposited into your checking account the same day as you apply. All you need to qualify is a checking account and a regular source of income...
PayDay Loan or Cash Advance Loan - A Post Christmas Gift
Cash advance > PayDay Loan or Cash Advance Loan - A Post Christmas Gift
The right small appliance for you
Don't let their name fool you. Small appliances can do a multitude of tasks. Take the tears out of chopping onions with a food processor or mini-chopper, mix bread dough with your food processor, make fresh sauces in the blender - the list could go on forever. How do you shop for small appliances? Price, brand, ease of use, warranty, ease of maintenance? All of these are important for sure. But the number one consideration should be what works best for you.
But always buy the most appliance...
appliances
Cash advance > The right small appliance for you
Jonathan Silverman Slated for "Angel on My Shoulder"
New York, NY November 24, 2004 - Jonathan Silverman joins the cast of the romantic-comedy / fantasy film, "Angel on My Shoulder" for New York-based T.H.E.M.E Entertainment. The project is the first theatrical remake of the 1946 classic which starred Paul Muni, Anne Baxter, and Claude Rains. Tim McCann helms the project with Todd Baker assuming writing and producing duties.Silverman will play the role of "Al", a wisecracking assistant to a do-gooder Manhattan Judge. The actor began his career...
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Cash advance > Jonathan Silverman Slated for "Angel on My Shoulder"
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